Foreign exchange and foreign exchange market

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1. Foreign exchange

Foreign exchange is a means of payment in foreign currency or in foreign currency that can be used for international settlement. Article 3 of the regulations on the administration of foreign exchange promulgated in 1996 stipulates as follows: foreign exchange refers to foreign currency. It includes paper money and coinage. ② Foreign currency payment certificate. Including bills, bank's payment voucher, postal savings certificate, etc. ③ Foreign currency securities. Including government bonds, corporate bonds, stocks, etc. ④ Special drawing rights. ⑤ Other assets valued in foreign currency.

2. Exchange rate and pricing method

Exchange rate, also known as exchange rate, refers to the price of one country's currency expressed in another country's currency, or the price comparison between two currencies.

In the foreign exchange market, the exchange rate is displayed in five digits, such as:

EUR 0.9705

JPY 119.95

GBP 1.5237

CHF 1.5003

The minimum unit of exchange rate change is a point, that is, a change in the last digit, such as:

EUR 0.0001

JPY 0.01

GBP 0.0001

CHF 0.0001

According to international practice, the name of a currency is usually represented by three English letters. The English after the Chinese name is the English code of the currency.

There are two kinds of pricing methods of exchange rate: direct pricing method and indirect pricing method.

(1) Direct price method

The direct quotation method, also known as the payable price method, is based on a certain unit (1, 100, 1000, 10000) of foreign currency as the standard to calculate how many units of domestic currency payable. It is equivalent to calculating how much local currency should be paid to purchase a certain unit of foreign currency, so it is called the payable price method. Most countries in the world, including China, adopt the direct bidding method. In the international foreign exchange market, Japanese yen, Swiss franc and Canadian dollar are all directly priced, such as Japanese yen 119.05, that is, one dollar to 119.05 yen.

Under the direct pricing method, if the amount of foreign currency converted into local currency in a certain unit is more than that in the previous period, it means that the value of foreign currency increases or the value of local currency falls, which is called the rise of foreign exchange rate; on the contrary, if you need to use less local currency than the original one, you can exchange the same amount of foreign currency, which means that the value of foreign currency or the value of local currency increases, which is called the decline of foreign exchange rate, that is, the value of foreign currency and foreign exchange The rise and fall of the rate is in direct proportion.

(2) Indirect price method

Indirect pricing method is also called receivable pricing method. It is based on a certain unit (such as a unit) of domestic currency as the standard, to calculate the receivable of several units of foreign currency. In the international foreign exchange market, euro, pound and Australian dollar are all indirectly priced. For example, euro 0.9705, i.e. one euro to 0.9705 US dollars.

In the indirect pricing method, the amount of domestic currency remains unchanged, while the amount of foreign currency changes with the comparison of the value of domestic currency. If the amount of foreign currency that can be exchanged by a certain amount of local currency is less than that in the previous period, this indicates that the value of foreign currency rises and the value of local currency decreases, that is, the exchange rate rises; on the contrary, if the amount of foreign currency that can be exchanged by a certain amount of local currency is more than that in the previous period, it means that the value of foreign currency is inversely proportional to the rise and fall of exchange rate.

The quotation in the foreign exchange market is generally a two-way quotation, that is, the offeror shall quote his own buying and selling prices at the same time, and the customer shall decide the buying and selling direction by himself. The smaller the difference between the bid price and the ask price means the lower the cost for investors. The quotation point difference of inter-bank transactions is normally 2-3 points, and the quotation point difference of banks (or dealers) to customers varies greatly according to different situations. At present, the quotation point difference of margin trading in foreign countries is basically 3-5 points, that of Hong Kong is 6-8 points, and that of domestic banks is 10-40 points.

3. Foreign exchange market

At present, there are many kinds of financial commodity markets in the world, but they can be divided into stock market, interest market (including bonds, commercial paper, etc.), gold market (including gold, platinum, silver), futures market (including grain, cotton, oil, etc.), option market and foreign exchange market.

Foreign exchange market refers to the place where foreign exchange is traded, or where different currencies are exchanged with each other. Foreign exchange market exists because:

Trade and investment

Importers and exporters pay in one currency when importing goods and receive another currency when exporting goods. This means that they receive and pay in different currencies when they close their accounts. As a result, they need to convert some of the money they receive into money that they can use to buy goods. Similarly, a company that buys foreign assets has to pay in the currency of the country concerned, so it needs to convert its own currency into the currency of the country concerned.

Speculation

The exchange rate between the two currencies changes with the supply and demand between the two currencies. A trader can make a profit by buying one currency at one exchange rate and selling it at a more favorable rate. Speculation accounts for the vast majority of foreign exchange market transactions.

hedging

Because of the fluctuation of exchange rate between the two related currencies, companies that own foreign assets (such as factories) may suffer some risks when translating these assets into the currency of the host country. When the value of a foreign asset denominated in foreign currency remains unchanged for a period of time, if the exchange rate changes and the value of the asset is translated in domestic currency, profit and loss will be generated. Companies can eliminate this potential gain or loss by hedging. This is the execution of a foreign exchange transaction, the result of which just offsets the gains and losses of foreign currency assets arising from exchange rate changes.

As an international capital speculation market, the history of foreign exchange market is much shorter than that of stock, gold, futures and interest market. However, it develops rapidly at an amazing speed. Today, the daily trading volume of the foreign exchange market has reached 1.5 trillion US dollars. Its scale has far exceeded the stock, futures and other financial commodity markets, and has become the world's largest single financial market and speculative market.

Since the birth of the foreign exchange market, the foreign exchange market has become increasingly volatile. In September 1985, one dollar was exchanged for 220 yen, while in May 1986, one dollar could only be converted to 160 yen. In eight months, the yen appreciated by 27%. In recent years, the volatility of the foreign exchange market has become even greater. On September 8, 1992, the exchange rate of 1 pound was converted to 2.0100 US dollars, and on November 10, 1992, the exchange rate of 1 pound to us dollar was reduced by more than 5000 points, and the depreciation rate was 25%. Not only that, at present, the daily fluctuation of exchange rate in the foreign exchange market is also increasing, and it is common practice to rise or fall by 2% to 3% a day. On September 16, 1992, the pound fell from 1.8755 to 1.7850 against the U.S. dollar, and the pound fell 5% a day.

Because of the frequent and huge fluctuation of the foreign exchange market, more opportunities have been created for investors and more and more investors have been attracted to join the ranks.

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